The way that I understand it, the first stage of of both mechanically and chemically sharpened hooks is made with a normal needle grinding method. The wire then goes through all the other stages to make it into a finished hook and it is then heat-treated.

On chemically sharpened hooks, the hooks go through an additional process in which a chemical is used to attack the surface. The thinner parts of the wire are affected and, in particular, the point. The chemical smoothes or "eats away" the metal leaving a sharper, more polished point.

I normally tie 99% of my flies with mechanically sharpened hooks mainly because of the cost of mechanically sharpened vs. chemically sharpened. I do like the chemically sharpened hooks though.

Judgrbbjr's thoughts are pretty much my own. I'd add that this has come up more than once in my reading on flyfishing and it is often said that a quality chemically sharpened hook will outperform one that is mechanically sharpened. I can't prove it myself, but it's worth noting.

I do think the most important method of sharpening your hook is the one you do with that sharpener that should be hanging from your vest. Testing the hook's sharpness and resharpening is far more important--and something that's severely neglected.